Asking AI about predicting recessions and investing in treasuries
Posted By RichC on October 25, 2024
Nobody really knows when the next recession will come, but economists and those of us who monitor investments would really like to know before it arrives.
This week while moving a few more dollars to the sideline, at least until after the November 2024 election and until mid-January 2025 (parked in a 3-month CD) … I decided to see what Perplexity.AI has to say about predicting recessions and buying US Treasuries if the Fed’s soft landing doesn’t happen.
Deciding when to buy Treasuries and identifying when a recession is near can be challenging, but there are several indicators and strategies to consider:
Identifying a Potential Recession
Economic Indicators
- Watch the Leading Economic Index (LEI): A sustained drop below zero in the Conference Board’s US Leading Indicator Index is a strong signal of an impending recession.
- Monitor yield curve inversions: An inverted yield curve has historically been one of the most reliable recession indicators.
- Track GDP growth, unemployment rates, and consumer spending: Declines in these areas can signal economic weakness.
Market Behavior
- Observe stock market trends: While not always accurate, significant market declines can sometimes precede recessions.
- Monitor corporate earnings: Widespread earnings declines across sectors may indicate economic trouble.
Timing Treasury Purchases
Interest Rate Cycles
- Interest rates tend to peak about three months before a recession starts.
- Treasury performance typically bottoms around three months before a recession and peaks about five months into it.
Market Sentiment
- Increased demand for “safe haven” assets often signals economic uncertainty.
- When investors become risk-averse, they tend to flock to Treasuries, driving up prices and lowering yields.
Federal Reserve Policy
- Pay attention to the Federal Reserve’s monetary policy. Rate cuts often precede or coincide with recessions, making Treasuries more attractive.
Strategies for Treasury Investments
- Dollar-Cost Averaging: Instead of trying to time the market perfectly, consider regularly investing in Treasuries over time5.
- Laddering: Build a portfolio of Treasuries with staggered maturities to balance yield and flexibility.
- Diversification: Use Treasuries as part of a broader, diversified portfolio strategy to manage risk.
- Long-Term Perspective: Remember that Treasuries can play a valuable role in portfolio stability, regardless of short-term economic conditions.
It’s important to note that perfectly timing the market or a recession is extremely difficult, even for professional investors. A well-diversified portfolio that aligns with your long-term financial goals is often the best approach, regardless of economic conditions
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